Category: LLC

Must a Limited Liability Company make distributions to its members?

What happens when a member of a Limited Liability Company (LLC) wants an interim distribution, but the other members don’t?  An issue that may arise in a closely held-business formed as an LLC.  LLCs, unlike corporations, are treated as pass-through entities for federal tax purposes, members are taxed based on their interest in the LLC and their proportionate income, whether or not a distribution is made (while it is possible to treat the LLC as a corporation for tax purposes, this is the subject for your CPA or tax adviser to discuss). A member may be allocated income from the company, but may never receive a distribution related to that money.  Some members may not be able to pay taxes on money never received and may demand a distribution. This is one of many issues that may arise in a closely held LLC that can be mitigated in advance with a well drafted operating agreement. 

When forming an LLC with multiple members, a well drafted operating agreement is important for documenting ownership interest and governance of the LLC.  The operating agreement, like many contracts, is used to define the rights and obligations of the parties (members).  Illinois does not require specification as to the ownership interest of each member when filing the Articles of Organization. Further, Illinois does not require that all members be listed, only members with management authority.  

While there are numerous rights and obligations that may be outlined in an operating agreement, this article focuses on rights of distribution, when the company makes a transfer of money, property or other benefit to a member or a party with the member’s ‘distributional interest.’

Default Rule (no Operating Agreement):

The default rule, based on the Limited Liability Company Act (805 ILCS 180), is for distributions to be made in equal shares to the members.  The Act does not provide for mandatory or compelled distributions to members, except when the company is winding up its business.  Many operating agreements may mirror the statutory restrictions on distributions, but may include additional provisions and criteria for distributions. 

Time and Consent for Distribution (in Operating Agreement):

Members may wish to outline the timing and consent for distributions.  The Act does not specify a timing mechanism or voting requirement to make a distribution to members.   An operating agreement can dictate when a distribution is made to the members of the company and may outline the authorization needed for a distribution, including unanimous or majority consent by all members, or only certain members.  The operating agreement can also include requirements for distributions to members when tax liability is incurred. 

Restrictions on ‘Distributional Interest’:

Section 15-5 of the Act restricts what may be altered by an operating agreement, including the restriction of the rights of a person, other than a manager, member, and transferee of a member’s ‘distributional interest.’  Since a ‘distributional interest’ is treated as personal property and may be transferred in whole or in part, a member’s ‘distributional interest’ may be used to satisfy a third-party’s (often a creditor’s) claim against the member, without transferring the other rights held by the member.  Restricting that third-party’s right to a ‘distributional interest’ in the operating agreement violates the Act.     

Additionally, members should be mindful of circumstances when distributions may not be made, regardless of what the operating agreement may state.  A Distribution should not be made, when the LLC would not be able to pay its debts as they become due in the ordinary course of business; or when the assets of the LLC would be less than Liabilities and the amount needed to dissolve.  Individual members may be liable to the LLC for any amount of distribution that exceeds the amount that could have been distributed without violating the prohibitions on distributions.  So even if a distribution is made, but the company is indebted to third-party creditors, the creditors may seek the turnover of those funds from the member.   

When forming an LLC with multiple members, it is important to have a well drafted operating agreement, which may be worth the time and costs of a lawyer to draft and review.  

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between The Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Update to Limited Liability Company Act: Members and Managers may be liable for own wrongful acts or omissions, even while acting within their role for the LLC.

Illinois, through its legislative branches, recently amended the Limited Liability Company Act (805 ILCS 180) through Senate Bill 1495.  Part of the bill was to overrule interpretations of specified portions of the LLC Act set forth in Dass v. Yale, 2013 IL App (1st) 122520, specifically concerning Section 10-10, related to the liability of members and managers. 

Dass v. Yale was the result of an action filed against both an LLC and an individual related to property damage.  One issue presented to the Appellate Court was whether Section 10-10 of the LLC ACT exempts LLC members or managers from personal liability for torts or fraud committed in their capacity as members or manages of the LLC.  The Court in Dass answered this question in the affirmative, reasoning:

In the case at bar, the plain language of section 10-10 states that, ‘[e]xcept as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.’ 805 ILCS 180/10-10(a) (West 2010). Thus, ‘[s]ection 10-10 clearly indicates that a member or manager of an LLC is not personally liable for debts the company incurs unless each of the provisions in subsection (d) is met.’ Puleo, 368 Ill. App. 3d at 68. Here, there is no claim that [the manager] is liable under subsection (d), so [the manager] is not personally liable for the tort claim against [the LLC].

Dass, 2013 IL App. (1st) 122520 at ¶39.

The interpretation in Dass permitted individuals acting within their role for an LLC to escape individual liability for tortious conduct.  In Dass, the tortious conduct alleged was fraudulent misrepresentations by the Manager of the LLC.  The Manager was able to avoid individual liability.  The trial court concluded that the language of the Act protected the Manager “since all of the allegations of the complaint occurred while he was acting solely in his capacity as a manager of [the LLC].”  The appellate court agreed with the trial courts interpretation.

Senate Bill 1495 corrected the interpretation made in Dass, thus restoring personal liability for tortious acts of an individual, even if acting in his or her capacity as a manager or member of a LLC.  Sec. 10-10(a-5) now provides:

Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, agency, contract, and tort law. The purpose of this subsection (a-5) is to overrule the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company. This subsection is therefore intended to be applicable to actions with respect to which all timely appeals have not exhausted before the effective date of this amendatory Act of the 101st General Assembly as well as to all actions commenced on or after the effective date of this amendatory Act of the 101st General Assembly.

805 ILCS 180/10-10(a-5).

What does this mean for individuals operating an LLC?  You should be aware that you will remain liable for your individual actions, even if acting on behalf of the LLC. 

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between The Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

How to avoid listing your home address when operating a home based business in Illinois

By: Christian Blume – Illinois Business & Real Estate Attorney

Many individuals starting a home-based business may be concerned with listing their home address on public records, for any number of reasons.  A recent amendment to the Illinois Assumed Business Name Act, HB2528 carves out an exception for certain businesses to avoid listing their personal residence when personal safety is an issue.

The Assumed Business Name Act (805 ILCS 405) requires any person or persons transacting business under an assumed name (other than their real names) to file a certificate setting for the assumed business name in the county clerk of the county in which business is transacted.  The types of businesses that are required to register assumed business names include, sole proprietorships, general partnerships, and professional services corporations.  It does not require corporations, limited liability companies (LLC), or limited liability partnerships (LLP) to register their assumed name.

An assumed business name is any name other than that of the individual owner(s) of the business.  Example: Abraham Lincoln, P.C. would not need to register as an assumed name, but Lincoln Law would since it is not the actual name of the individual transacting the business as a professional corporation. 

In August 2019, the Assumed Business Name Act was amended, to add 805 ILCS 405/1a, effective January 1, 2020.  The amendment permits a person or persons transacting business under an assumed name at his or her personal residence, to list the county clerk as the default agent for service if listing their home address would put their safety at risk.  Certain conditions must be met in order to list the county clerk.  

  • The person reasonably believe that publishing his or her home address would put his or her safety at risk, and lists the reasons for that belief on a form submitted to county clerk, which shall be kept confidential;
  • The form is accompanied by a court order or police report;
  • The person provides the address of his or her residence to the county clerk, which shall be kept confidential.

The amendment further stipulates that the county clerk has a duty to notify the business of service of process on behalf of the business, and may charge a nominal fee for this service.  Therefore, effectuating service on an individual or individuals operating under an assumed name can be accomplished through the county clerk, like serving any other registered agent.  Whether the individual(s) receive(s) actual notice from the county clerk would not matter for purposes of jurisdiction, although this hasn’t been tested.

Lastly, the act does not list what the court order or police report must state in order, and leaves this question open for interpretation.  Must the police report or court order confirm there is a reasonable risk of safety for listing the home address?  

Additional Resource: Cook County Application to Register or Amend an Assumed Business Name

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.  The information in this article is current as of the date indicated, and may not be updated to reflect future changes/developments.  Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Illinois Creditor Law: Can you pierce the corporate veil after a final judgment?

As I discussed in a previous blog-post (DON’T PIERCE THE CORPORATE VEIL – 11 mistakes to avoid for small-businesses), piercing the corporate veil is an equitable remedy and a means to impose liability from an underlying claim. It is not a stand-alone cause of action; it must be merged with an underlying claim/cause of action.

A party can pierce the corporate veil as part of the underlying case, allege facts to support an alter-ego theory, and impose liability on the individual or entity attempting to be shielded by the corporate liability limits. However, in some cases a litigant may not have the facts necessary to allege an alter-ego theory until after final judgment before learning that the judgment debtor is unable to satisfy the judgement.

So, how can a creditor pierce the corporate veil after a final judgment against a debtor corporation?

In many cases, after a judgement is entered, supplementary proceedings may be commenced to collect on the judgment, including the filing of a citation to discover assets. (735 ILCS 5/2-1402). Language in 1402(c)(3), permits a judgement creditor to:

“Compel any person cited, other than the judgment debtor, to deliver up any assets so discovered, to be applied in satisfaction of the judgment, in whole or in part, when those assets are held under such circumstances that in an action by the judgment debtor he or she could recover them in specie or obtain a judgment for the proceeds or value thereof as for conversion or embezzlement. A judgment creditor may recover a corporate judgment debtor’s property on behalf of the judgment debtor for use of the judgment creditor by filing an appropriate petition within the citation proceedings.”

This section permits a judgment creditor to determine whether a third-party is holding assets of the judgment debtor, BUT cannot be used to pierce the corporate veil and find the third-party personally liable. Psyhos v. Heart-Land Development Co.

In Pyshos, the creditor secured a judgment in the underlying case and attempted to pierce the corporate veil in a supplementary proceeding. The appellate court found this improper. The court reasoned that the allegations in a supplementary proceeding are limited to considering the allegation that the third-party is holding assets of the judgment debtor, but a supplementary proceeding may not determine personal liability against those shareholder and directors. The Pyshos court outlined two approaches a judgment creditor may take to recovery against a third-party: (1) supplementary proceedings, alleging the third-party is in possession of assets of the judgment debtor, or (2) initiating a new proceeding to pierce the corporate veil.

(1) Supplementary Proceedings – to obtain assets of the judgment debtor, held by a third-party. A supplementary proceeding, can determine whether a third-party is in possession of assets of the judgment debtor. Those assets may be used to satisfy the judgment.
A supplementary proceeding can determine whether a judgment debtor transferred assets to a third-party in violation of the Illinois Uniform Fraudulent Transfer Act (UFTA). (740 ILCS 160), which conforms with Pyshos and precedential interpretation of 1402(c)(3). If the UFTA has been violated, the judgment creditor may be able to avoid the transfer to satisfy the underlying debt, or seek an attachment or other provisional remedy against the transferred asset or other property of the transferee. (740 ILCS 160/8).

While a violation of the UFTA permits some relief pertaining to the assets held by a third-party, it does not provide for personal liability against that third-party.

(2) Initiating a new proceeding to pierce the corporate veil. “A new proceeding is proper because, where a party obtains a judgment against another party, the underlying claim merges with the judgment and the judgment becomes a new and distinct obligation of the [judgment debtor] which differs in nature and essence from the original claim.” Pyshos.

We can look at the case of Buckley v. Abuzir. The Plaintiffs in Buckley obtained a default judgment against a corporation, for violation of the Illinois Trade Secrets Act. Unable to recover from the corporation, the Plaintiffs sought to recover from an individual, in a separate chancery action, under a alter-ego theory. The Plaintiffs incorporated the underlying judgement as part-of the suit to pierce the corporate veil and alleged facts to support an alter-ego theory; thereby merging the judgement with a separate suit. The relief sought was equitable, the legal relief had already been obtained in the underlying case. The filing of the second case was a means to attach liability to the individual for the underlying debt of the corporation.

*Starting a business or running a closely held business in Illinois? Contact Attorney Christian Blume at 773-706-7514 or christian@attorneyblume.com.

This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.  The information in this article is current as of the date indicated, and may not be updated to reflect future changes/developments.  Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.